By Tiernan Ray

Shares of disk drive maker Seagate Technology (STX) are down $6.83, or almost 12%, at $51.22, after the company last night reportedfiscal Q2 results that missed analysts’ expectations and forecast this quarter’s revenue slightly below expectations as well.

Seagate claimed a 3% year-over-year decline in drive units, to 56.6 million, or 40% of the addressable market, it said. Of some concern was the report of 14.4% operating margin, on a non-GAAP basis, which was lower than what many were looking for,

On a conference call with analysts, the company’s head of global markets and customers, Rocky Pimentel, said that trends in cloud computing made orders a bit erratic for some of the drives that come with the highest capacity:

I think the industry saw a bit of a softness in the cloud side of the enterprise drives, the capacity-centric enterprise drives. And that was really due to the timing of the buildouts and planning of CapEx. It’s continued to be a category that offers substantial long-term growth, but I think, as others have pointed out, it will be a situation where it will be lumpy until processes improve at the cloud-service providers to create a more smooth and linear approach to how they deploy their resources in the data center. But I think that was what you saw in the December quarter. Fundamentally, the category is very strong and represents a tremendous growth opportunity as we go forward.

On the same call, CEO Steve Luczo responded to an analyst’s question abut the outlook this quarter by saying that the overall drive industry “seems to have been operating in the 130 to 145 [million units range] range, and we expect it will continue to operate in that range,” before adding “within that range arguing about whether or not it’s an extra 1 million or 2 million units is not what drives the business models of the company.”

There have been no ratings changes on the stock today, that I can see, but a number of estimate cuts, especially given the weaker-than-expected operating margin. Some price targets were cut, to a minor degree.

Needham & Co.’s Richard Kugele reiterates a Buy rating, and a $62 price target, wiring that “At first glance STX’s F2Q performance was somewhat disappointing” but that “we find the outlook to be essentially unchanged, with solid margins and cash flow expected.”

“After years of strong cash flow and margin stability roused even the grouchiest of bears from their caves into upgrades recently, a stronger performance was likely required.”

He thinks investors should buy the sell-off.

Kugele trimmed his estimate for this year to $13.937 billion and $5.23 from a prior $13.94 billion and $5.26.

Similarly upbeat, Pacific Crest’s Monika Garg reiterates an Outperform rating on the shares, and a $65 price target, though she cut her model for the total addressable market slightly to 133 million to 135 million drives this quarter.

Garg urges investors to move past the “lumpiness” in cloud computing purchases, as well as higher operating expenses, and focus instead on how more sophisticated drives can improve gross margin:

Both Seagate and Western Digital expect enterprise capacity drives to grow by low teens to high teens y/y, which is better than our model. The company also expects branded drives to grow in the high single digits y/y. Both enterprise and branded drives carry higher gross margin than the corporate average. Our bullish view is based on shifts towards higher capacity enterprise and branded drives driving margins and revenue higher.

Despite the bullish outlook, Garg cut her estimates for this year to $13.88 billion in revenue and $5.08 per share from a prior $14.03 billion and $5.44 per share.

Bachman wishes Seagate’s outlook for this quarter is had been lower, in fact, given that the company is forecasting a mere 3% decline in sales from last quarter, which is more bullish than Western’s outlook last week for 6% to 8%, which he thinks might be overly bullish:

STX’s revenue guidance implies a decline of about 3% q/q for the March quarter. WDC’s revenue guidance was down 6%-8% q/q, based on a TAM decline of 5%-8% q/q, or in the 131-135 million range. Although STX only commented that the TAM will be in 130-145 million range, STX’s revenue guidance suggests a higher TAM than WDC. While visibility in the PC market is low, we do not believe that the PC market is experiencing a meaningful seasonal drop-off in demand. Moreover, in the March 2013 quarter, we note that the PC market declined 12% q/q, but HDDs for PCs declined only 2% q/q. Although we believe that WDC’s guidance is conservative, we would have preferred a more cautious outlook from STX, given the miss.

Bachman cut his estimates for this year to $5.09 per share in net profit from a prior $5.32, on revenue of $14.35 billion.

Daryanani is cautious about the company’s operating margin, writing “Overall, while we are starting to see nascent signs of improving TAM, investors will continue to watch for OPEX leverage to ensure that STX can translate better revenue growth and mix to its bottom line.”

Still, he doesn’t see cause for alarm, noting that “While operating expenses should exceed the high-end of the company’s long term guided range of 12-14% in the Mar- qtr given investments in cloud and mobility initiatives, operating expenses should fall within the long term range for the full year.”

About Tech Trader Daily

Tech Trader Daily is a blog on technology investing written by Barron’s veteran Tiernan Ray. The blog provides news, analysis and original reporting on events important to investors in software, hardware, the Internet, telecommunications and related fields. Comments and tips can be sent to: techtraderdaily@barrons.com.